Winners and losers of Living Wage campaign - The City View

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National Living Wage: There will be unintended consequences.
The problem with nuance and complexity is that they get in the way of simple government announcements.

Take, as a prime example, the debate around the national minimum wage (NMW). The Low Pay Commission (LPC) was created in 1998 to offer independent advice on the NMW – precisely because politicians were deemed incapable of resisting the temptation to push the rate up too fast.

The commission was seen to have done an admirable job at balancing the interests of employer and employee; and so imagine the surprise when it was informed just hours before this year’s Summer Budget that its remit was being torn up and that the government would set a new level of minimum earnings.

From April next year, those over 25 will benefit from a so-called National Living Wage, set at £7.20 and rising to at least £9 per hour by the end of this parliament. The news was met with justified scepticism by some employers and business groups.

Former Sainsbury’s chief executive Justin King said the move was “ludicrous”, while outgoing CBI director general John Cridland said it was “not obvious that businesses will be able to cope with that level of imposed wage cost increases”. In other words, there will be unintended consequences.

Today, global recruitment specialists Manpower adds to these concerns with a report identifying a slowdown in UK-wide hiring which they attribute in no uncertain terms to the impending rise in the cost of labour. Adding to the expense of employment with a significant rise in fixed labour costs across the board will compel some employers to look for savings elsewhere. The obvious place to start will be in finding productivity gains in the existing workforce rather than adding to it with new hires.

If the government wants to mitigate these inevitable consequences it should look to reduce costs elsewhere, starting with the burden of National Insurance contributions. The political temptation to announce a “pay rise for everybody” was exactly why the LPC was established.

The complexities of the debate and the reality of low-skilled work mean that if the government’s mandated rise in the cost of labour is to be accommodated, it must be offset by a reduction in employment costs elsewhere.

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